Section 54B Capital Gains Exemption: Save Tax When Selling Agricultural Land

Section 54B Capital Gains Exemption: Save Tax When Selling Agricultural Land

The Income Tax Act provides relief to taxpayers from paying capital gains tax if they reinvest the profit amount gained from selling the capital in buying certain approved new assets. These tax exemptions are allowed under sections including Section 54, Section 54B, Section 54D, Section 54EC, Section 54EE, Section 54F, Section 54G, Section 54GA, Section 54GB, etc.

In this article, we will discuss about how one can avoid paying capital gain tax using Section 54B of the Income Tax Act. This section helps in providing capital gain tax exemption to individuals and Hindu Undivided Families (HUFs) from short-term and long-term capital gains arising from the transfer of agricultural land. This section is specifically designed to promote agricultural activity and protect farmers from paying tax on the profits they earn by selling agricultural land, if they use that money to buy new agricultural land.

To enjoy capital gain exemption under Section 54B, the land that is being sold must be used for the purposes of agriculture for a minimum of two years immediately before the date of sale. This use can be by the individual selling the land, his/her parents, or, in the case of an HUF, by any member of the family.

Under this section, individual who earns capital gain (profit) on selling a agricultural land can claim capital gain exemption if he/she reinvests capital gain amount in buying another piece of agricultural land, provided the land land must be purchased within a certain time limit, i.e., two years from the date of the sale of the original land.

If the individual does not use the complete capital gain amount in buying new land before filing his/her income tax return (ITR), they still can get a chance to claim the remaining exemption. They are allowed to deposit the unused capital gain amount in a special bank account called the “Capital Gains Deposit Account Scheme (CGDAS)” before the deadline for filing the ITR. This deposit still qualifies Section 54B capital gain exemption.

According to Section 54B, the amount of exemption claimed using this section will be lower to two values. The values are as follows:

• The capital gain amount earned from selling the old agricultural land, or
• The amount spent to buy the new agricultural land, including the amount deposited in the Capital Gains Deposit Account Scheme.

After depositing the amount in the CGDA Scheme, the individual can utilise that deposited amount in purchasing new agricultural land within the time period of two years after the date of transfer of the original asset. If they do not use the deposit within that 2-year window, the unutilised amount will be considered as capital gains in the year when the 2-year time limit expires. This means the exemption will be taken back, and the person will have to pay tax on the unused part.

Also, if the person sells the newly purchased agricultural land within 3 years of buying it, the earlier exemption under Section 54B will be cancelled. In such cases, when calculating capital gains on the sale of this new land, the amount of exemption taken earlier will be subtracted from the cost of this new land, which will increase the taxable profit.